Today's decline was no surprise. I warned this week would be choppy as procrastinators finally made the decision to restructure their portfolios before 2014 comes to a close.
This week is normally choppy as the laggards take profits and/or sell their losers before the tax deadline at Wednesday's close. This is kind of like Christmas shopping. There are always some people who put it off until the last minute. With very low volume these last minute moves tend to move the market.
There were no economic reports driving traders. The Consumer Confidence report for December rose from an upwardly revised 91.0 to 92.6. While still below the October eight-year high at 94.1 it was still strong. November's headline number was revised up from 88.7 to 91.0.
The present conditions component rose from 93.7 to 98.6. The expectations component declined from 89.3 to 88.5. That was the second consecutive monthly decline. Those planning on buying a car declined from 12.9% to 12.1%. Prospective home buyers declined from 6.5% to 4.8%. Appliance buyers rose from 51.6% to 52.2%.
Only 18% of respondents expected business conditions to improve over the next six months. However, those that think current conditions are bad declined from 21.8% to 19.6% suggesting conditions may be improving.
The falling gasoline prices probably influenced the gains in the current conditions component while the normal post Christmas letdown and worry about paying those credit card bills with holiday charges may have depressed the expectation component.
The Texas Service Sector Outlook Survey declined from 17.3 to 12.7 and the third consecutive month of decline from the 27.4 high in September. All but one component declined and that was hours worked with a rise from 4.4 to 7.3, which should be a precursor to additional hiring except this could have been retail workers extending holiday hours.
Tomorrow's calendar is also weak with pending home sales the only material report. With the focus on energy recently the oil inventory report could also be a market mover on low volume. Last week's unexpected 7.3 million barrel gain was a weight on the market.
Friday's ISM is going to be the big report for the week but nobody will be around to see it. Volume will be extremely low so any unexpected decline in the ISM could be market negative.
The news moving the markets at the open was a protest in front of the Kremlin in Moscow. The protest was in opposition to the sentencing of Oleg Navalny, a blogger critical of the government who was convicted of embezzling money. He received a 3.5 year sentence while his brother Alexei who was convicted of the same crime received a suspended sentence.
Writing against the government in Russia is a criminal offense. The sentencing was thought to be a message to other bloggers to be careful what they say or they will be next. If your blogging does not violate some specific crime the government will make one up and convict you of that one. If you own a business the government wants they will charge you with tax evasion or EPA violations and seize the business. This is how things get done in Russia. However, if you agree to accept Putin as a partner in your business you will prosper. Putin is reportedly worth $150 billion as a result of corruption and partnerships like these.
The police moved in quickly to break up the protest with as many as 100 arrested. The U.S. State Dept called the sentencing of the brothers a "disturbing development designed to punish and deter political activism." Alexei was an opposition leader three years ago when tens of thousands took to the streets to protest Putin and the inner circle. Opposition leaders today claim jailing Alexei would have risked a new wave of protests so the government punished Alexei by jailing his brother instead.
Putin is on the verge of some serious trouble in Russia and he has to keep a firm hand on the population to prevent demonstrations from getting out of hand. Expect more protests in the future and more protestors going to jail. Analysts claim this is not a repeat of 1998 when Russia defaulted on its debt but Russia is in serious financial difficulty.
The markets were still weak as a result of the Greek presidential vote over the weekend. The third parliamentary election failed to elect a president and endorse the choice of Prime Minister Samaras and that means a general election will be scheduled for early in 2015 and there is a good possibility an anti-EU candidate could be elected and throw the economic recovery into jeopardy. The opposition candidate likely to run is against the bailout by the Troika and against the EU.
Treasuries rose for the second day on the worries over Russia and Greece. The yield on the ten-year declined to 2.19% after hitting 2.3% last Wednesday.
The best thing that happened all day was my friend Art Cashin celebrating his 50th anniversary of being a NYSE member. He started on December 30th, 1964, 50 years ago at the age of 23. He was one of the youngest to ever hold a seat on the exchange. He got to ring the opening bell at the NYSE today and a well deserved privilege. Congratulations Art!
In stock news Apple shares declined after ABI Research said iPad 2014 sales were expected to decline for the first time in the five-year history of the tablet. The forecast is for sales of 68 million units down from 74 million in 2013. Typically Apple gets 35% of its iPad sales in Q4 and the research firm expects sales in Q4 to lag estimates.
ABI also expects Amazon, Barnes & Noble and Google to also post lower tablet sales. Meanwhile Samsung is expected to post a gain with 43 million in sales compared to 38 million in 2013. Also expected to post gains are Acer, ASUS, Dell, HP, Lenovo, LG and Microsoft. Android tablets are expected to garner a 54% share of the branded tablet market with iOS at 41% and Windows 8 at 5%. ABI expects the overall sales of tablets to rise +16% in 2015 to 194 million and rising to 290 million in sales for 2019.
In the seven days leading up to Christmas 11% of new device activations were full size tablets and 11% for small tablets. The company said the larger iPhone six was impacting iPad sales.
Microsoft (MSFT) is said to be working on a stripped down browser to compete with Google's Chrome. Code-named Spartan, the new browser will look more like Firefox and Chrome and will support extensions. Internet Explorer may have helped pioneer the Internet back in the 1990s but it has grown to be big, bulky and slow compared to its competitors and it does not play well with mobile devices. Spartan will be bundled with Windows 10 according to ZDNet. Desktop users will receive IE 11 and Spartan. Chrome recently took over the top spot in the browser rankings with a 6% gain to 31.8%. IE dropped -6% to 30.9%. Apple's Safari holds a 25% share.
There is a dark side to cheap gasoline. Prices have collapsed so fast that a barrel of gasoline cost $50.40 on the spot market ($1.20 gallon) and the price of oil was $54. That means refiners would lose money refining gasoline today if it were not for the other products that are refined from the same barrel of oil. Diesel cost $78.54 per 42 gallon barrel or $1.87 a gallon. The oil glut has turned into a gasoline glut with gasoline futures hitting a 5-year low at $1.45 on Tuesday. Some analysts are now predicting a national average for gasoline under $2.00 while others are forecasting $2.13 to $2.19. These numbers will not last long if refiners can't make a profit. They are not going to refine gasoline for a loss. That will shrink supply and prices will rise. Last week the EIA reported a record output of 9.92 mbpd for refined gasoline. With diesel and jet fuel prices finally dropping we should see refiners back off from the 93.5% utilization factor we saw over the last two weeks.
Researchers believe they have discovered patient zero in the Ebola outbreak. The source was a 2-year-old boy in Meliandou, Guinea. He played in a tree that was a nesting place for bats. Researchers theorize he contacted the disease from the bat droppings and died in December 2013. His family became infected from him and spread that infection throughout his village and on to Liberia, Sierra Leone, Nigeria, Mali and Senegal. So far more than 20,000 people have been infected and more than 8,000 have died. If only the parents and child had practiced basic safety methods like frequent hand washing the outcome may have been significantly different.
Remember last week when the market was setting new highs? Investors poured more money into U.S. based equity funds at a record rate. Mutual funds and exchange traded funds (ETFs) saw their biggest weekly inflows ever. According to Thomson Reuters U.S. funds took in more than $36.5 billion last week. That is in addition to $81.3 billion that has flowed into ETFs since October. According to TrimTabs.com that is the largest three-month inflow ever. According to ETF.com the S&P tracking ETF (SPY) received $27.3 billion of that total.
Very large inflows are negative on a contrarian basis. That means everyone is "all in" at a market top. Of course there will be more inflows this week and next as retirement contributions and year-end bonuses are put to work. That typically supports the market into the January option expiration cycle.
The S&P gave back -10 points to close at 2,080 with one trading day left in 2014. With 2,100 the unofficial target for the end of 2014 it would take a very bullish day on Wednesday to hit that target. With the S&P up +12.5% for the year it would also take a huge market drop to take us back to single digit gains.
The tax sellers should be done but given the rebound off the December lows we could still see some additional profit taking. If you don't have a specific reason to be in the market I would probably pass on adding new positions until next week. I still remember January 2008. The last three days of December posted losses and January 2nd started a -130 point S&P decline by January 22nd. The market was strongly directional to the downside but 2008 was a different time and the beginning of the financial crisis. We can't really compare that January with expectations for this January but it does make me cautious.
My official outlook is for further gains in early January and then some serious profit taking after option expiration. Whether that comes true or not remains to be seen.
The 2,080 level is initial support on the S&P so there is the potential for a rebound on Wednesday. A further decline could spoil hopes for a strong start to 2015 on Friday.
The Dow continued its pattern of weakness that started last week. The intraday shadows on those candles from last week predicted a future decline. The Dow weakness today was led by Caterpillar but it was broad based with only four companies finishing in the green. However, there were no big losses. This appeared to be simple profit taking rather than some change in direction.
The Dow closed back below 18,000 but still above three uptrend lines of resistance, which should now be support. I am neutral on the Dow fundamentally but the +1,034 point rebound from 17,069 on December 17th to the 18,103 high on December 26th is begging for some profit taking. The Dow should not rebound 1,034 points in 7 trading days without a decent retracement of some of those gains.
The Nasdaq Composite declined to close below prior resistance at 4,800 but still above uptrend support at 4,770. This could aid in producing a rebound on Wednesday but I am cautious we could see further choppy trading. I would not rush into Nasdaq stocks or any stocks for that matter until next week and then only after seeing how the market begins 2015.
There is no reason to rush into the market on Wednesday. Don't let your early celebration of New Years Eve trick you into making trades while under the influence of a high blood alcohol content. Enjoy your parties and plan to take a sober look at the market on Monday.
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